If you’ve looked at franchises online, you’ve probably seen ads with click-baity headlines like “Franchises Starting from $30k” or “Own a Business for Only $30k”. While there are absolutely business opportunities for $30k (or less), the reality is that you will be very disappointed as the true cost of most of these models is far more than that.
So how do marketers get away with those headlines? Because they are only referring to one aspect of franchise ownership: the franchise fee.
Franchise Fee – A franchise fee is a fee or charge that one party, known as the franchisee, pays another party, known as the franchisor, for the right to enter in a franchise agreement. Generally by paying the franchise fee a franchisee receives the rights to sell goods or services, under the franchisor’s trademarks, as well as access to the franchisor’s business processes.
– Wikipedia
The “Franchise Fee” is an important figure as it reflects the “cost of buying into a brand”, but it is by far not the only expense necessary to prepare for a successful business venture. For example, here’s a short list of things that should be expected:
- Brand / Marketing costs (how will people know about your business)
- Buildout / Equipment / Inventory (what do you need to operate the business)
- Lease / Leasehold Improvements (only if physical location)
- Working capital (should be a few months of expenses accounted for as business ramps up)
- Salaries (even if you are working alone, you need to include in Working Capital)
- Miscellaneous Expenses (local marketing, training, software fees, etc.)
- Royalties – if it’s a franchise, then there will be a portion of revenue going back to the franchisor (eventually)
When reviewing a franchise opportunity, they will disclose their full breakdown in the Item 7 section of their FDD (Franchise Disclosure Document). However, you are likely not going to see an FDD until you meet with the franchise… and you may not get that meeting unless you are also financially qualified (meaning you meet their criteria for a minimum Net Worth and Liquid Capital availability).
Personally, these ads are disappointing to me (and to many who click on them) because they demean the value of the franchise model and the matchmaking that a consultant does to match the right business to the right owner. Click-bait headlines are poor excuses for understanding the true investment opportunity of a franchise business.
As Wayne from Wayne’s World might say to “Franchises for only $30k” –
Questions? Reach out to Shawn Gurn at shawn@hoffranchiseconsulting.com